Nov. 3 (Bloomberg) -- The European Central Bank
unexpectedly cut interest rates at Mario Draghi’s first meeting
in charge even as the new president signaled no plans to
backstop the region’s most vulnerable nations as the escalating
debt crisis threatens to splinter the euro region.

“What makes you think that becoming the lender of last
resort for governments is what you need to keep the euro region
together?” Draghi asked reporters in Frankfurt today. “That is
not really in the remit of the ECB. The remit of the ECB is
maintaining price stability in the medium term.”

ECB officials unanimously lowered the benchmark interest
rate by 25 basis points to 1.25 percent, confounding 51 of 55
economists in a Bloomberg News survey. Only four predicted a
quarter-point move and two expected a half-point reduction.
Italian bond yields fell after the rate cut and the euro
extended declines, dropping as much as 0.8 percent to $1.3657.

European leaders last night raised the prospect of the 17-member area breaking apart, with France and Germany saying they
would treat Greece’s surprise referendum on a second bailout as
a vote on its euro membership. With the region’s economic
slowdown deepening and investors growing increasingly concerned,
the ECB was under pressure to reverse this year’s two rate
increases.

‘Wall of Money’

The ECB needs to “go into the market and say ‘We have a
wall of money here and no matter how much speculation there is,
we’re going to keep buying Italian bonds or any other euro bonds
that are threatened’,” Irish Finance Minister Michael Noonan
told Dublin-based RTE Radio yesterday.

Draghi rebuffed those calls, sticking to the line adopted
by his predecessor, Jean-Claude Trichet. The ECB’s bond purchase
program is “temporary, it’s limited in the amount and it’s
justified on the basis of restoring the functioning of monetary
policy transmission channels,” he said.

The yield on Italy’s 10-year government bond, which fell 5
basis points to 6.13 percent on the rate cut, rose to 6.21
percent as Draghi spoke before dropping again. Earlier, it
touched a euro-era record of 6.35 percent. Spain’s 10-year yield
fell 1 basis point to 5.41 percent.

“It’s a bold move by Draghi,” said Howard Archer, chief
European economist at IHS Global Insight in London, who predicts
another quarter-point cut within months. “He’s not going to be
afraid of making bold moves, which is what’s needed in the
current environment.”

Downward Revisions

Draghi said recent data suggest the ECB will probably have
to revise down growth forecasts in its next round of projections
due in December.

Unemployment in Germany, Europe’s largest economy,
unexpectedly rose for the first time in more than two years in
October and Europe’s manufacturing industry contracted for a
third month.

The Organization for Economic Cooperation and Development
on Oct. 31 lowered its growth forecast for the U.S. and the euro
area. The U.S. economy, the world’s largest, will expand 1.7
percent this year and 1.8 percent next, the Paris-based OECD
said. By contrast, the euro area’s will grow 1.6 percent in 2011
and just 0.3 percent in 2012, it said.

While the current inflation rate of 3 percent is well above
the ECB’s 2 percent limit, weaker growth and demand may drive
down oil prices. The ECB currently forecasts inflation will slow
to 1.7 percent in 2012.